February 25, 2013

The China Syndrome

China recently was caught red-handed in a major hacking/cyber-spying effort. Everyone already knew or suspected China has habitually been involved in nefarious cyber-activity. And now the truth is out and something clearly needs to be done about it.

A Feb. 19 report from computer security firm Mandiant Corp. asserts that the Chinese government is involved in a major cyber-espionage campaign to steal sensitive data from organizations in the United States and other countries.

The report from Alexandria, Va.-based Mandiant said that since at least 2006 a hacking group in China has stolen hundreds of terabytes of data from as many as 141 organizations. According to the report, the hacking group used internet protocol addresses registered in Shanghai and appears to be linked to a Chinese military unit.

Firstly, let's dismiss the conspiracy theory that the Obama administration is following the Bill Clinton Yugoslavia start-a-war trick to divert attention from other serious issues playbook. Yes, casting China as a villain right now certainly would help the president domestically. It would distract people from the deficit and sequester issues, which the president is clearly worried about. And the common enemy could rope in some Republicans to help the president out domestically because, after all, we have a bigger threat that we are all seemingly on the same page regarding.

But China is a problem and it's one that needs to be met face on from a free-trade stand point. I've always been an advocate of free trade. The very first lesson in basic economics talks about opportunity cost, and it leads to the obvious conclusion that nations should specialize in production where they have a competitive advantage. That is helped when there is free trade - it is not a zero-sum game. Producers and consumers in two nations who engage in free trade with specialization all benefit. Society itself operates at its most efficient in that situation.

But free trade assumes a number of things that aren't present with China. China engages in a modern-day effort of industrial espionage. China manipulates it's currency to take advantage of America's tendency to promote free trade. China doesn't allow free and open access to its marketplace. China, a communist worker's paradise, pays it's workers what we'd consider slave wages. China sells cheap knock-off products around the world that violate copyright and patent laws. China doesn't require worker safety rules that America does. China bends or changes the rules as required to suit its own interests. In other words, the playing field is not level.

Nevertheless, China is granted most favored nation status (which imparts on them trade benefits). It was granted by Bill Clinton and made permanent in 2001.

Free trade only works when both parties act in good faith. China does not - economically, or in other ways either. China needs to be dealt with according to their actions. They should no longer qualify for most favored nation status. They are stealing intellectual capital from the United States, on a massive scale. Yes, changes to the relationship with China could create a trade war. Trade wars are bad. But it would be worse for China than for the United States. China could lose access to what it is stealing as well as the market for products from its ill-gotten intellectual gains. China is enriching itself and empowering itself to the level of superpower in large part on the backs of American intellectual property.

The United States cannot afford to stand by and let that happen, particularly when there are other countries who are willing to play fairly and do not enjoy that same status. Yes producers in America will be hurt. Some of them. But many American companies have benefited by China's status for their production. They can always move labor to other nations with cheap labor or maybe even onshore those jobs.

There are a lot of possible consequences to work through, but the consequences of inaction, long term, will be far worse.